Obstacles to Corporate Competitiveness

▽Limit on Tax deduction period, what is the problem = The tax loss carried forward deduction policy is a tax deduction policy for subjects which have deficit in the previous year. Even if their current year’s incomes are adequate to pay the tax, there are deducted from taxation subject.

For example, let’s assume a corporate A made an annual deficit of 1,000 billion won. For next ten years after that deficit, corporate A made annual incomes of 100 billion.

Because the deficit carried forward for next five years is more than the annual income, the corporate pays no tax at all. But on the sixth year, even if the deficit carried forward is more than the income, they have to pay an annual corporate tax of 27 billion won. This is because the tax deduction period has expired.

If you look at the period of eleven years overall, corporate A’s total deficits (1,000 billion won) and total incomes (1,000 billion won) are equal. According to calculation, there is no net income but the corporate still has to pay a tax of 135 billion won.

“Many domestic corporate have huge losses due to foreign exchange crisis. Because of huge losses, some corporate will not have full compensation within five years,” said one Airline official.

“Many corporate, Airline companies included will suffer loss of competitiveness from tax reduction period,” he added.

▽Disadvantage compare to foreign corporate = If the corporate A is an American or German company, they pay no tax at all.

American companies receive two years of tax refund and eligible for tax reduction period of twenty years. This is four times longer than Korean tax reduction period.

The Tax Refund is a policy in which if a company has deficit, the company receives a tax refund from previous years’ taxes. Korea has similar policy but only small and medium companies are eligible.

German companies receive tax refund for two years within certain amount and receive indefinite tax reduction period for the balances.

Netherlands, Britain and Australia also have indefinite period of tax reduction on tax carried forward. The tax refund period for Netherlands and Britain are three and one year respectively. Australia has no limited period. Singapore allows indefinite period of tax reduction as long as there is no change of ownership over 50% of companies’ stock. Only Japan has fixed its tax reduction period to five years similar to Korea.

△Deficit = expanse amount that exceeds the income △Tax carried forward = Deficit amounts that occurred in the previous fiscal year and carried forward without tax reduction.

Kwang-Am Cheon iam@donga.com